0

SEC filings say the darndest things. In a Friday 10-Q filing, AT&T assured investors that the termination of any handset exclusivity agreement (especially that itsy bitsy deal with Apple) will not have a “material negative impact” on earnings. I heartily welcome the injection of comedy in typically drab SEC filings, but if AT&T is being sincere, they’re in for a rude awakening when the sands run out.

As the WSJ points out, this is the first time AT&T has addressed this issue at length in a filing and it comes amid rumors that Apple is preparing to end its exclusivity agreement with AT&T as early as next year. In recent months, speculation has intensified on reports that both Verizon and T-Mobile could get in on the action in 2011.

How does AT&T justify its claim? The wireless provider argues in the filing that 80% of its contract subscribers are on family or business plans. Thus, under their logic, the majority of subscribers will not switch because it will be too difficult to transfer an entire group and these “group” subscribers will be hesitant to relinquish certain AT&T perks like the rollover minutes they’ve accumulated.

Further, via its explanation, AT&T also points out that the iPhone was specifically designed to work with AT&T’s network and technology, and thus a different version may lose some of the functionality. See an excerpt of the filing below.

These are fairly strong arguments, I highly doubt that consumers on business plans will be able to switch. In May, Ron Spears, CEO of AT&T Business Solutions, announced that four out of ten iphones sold were being sold to businesses. A sizable portion of the pie but what about the six out of ten sold?

The majority of that group will be, as AT&T pointed out, users on family plans— but their hold on this demographic is less convincing. It’s far easier for a family to change carriers versus a business and it’s even easier for a few fed-up family members to just go rogue. In addition, there is that 20% chunk of individual users, who are highly mobile. If Verizon or T-Mobile, or whoever the next iPhone carrier is, attracts a large number of defectors from this slice, guess what AT&T, you have a material impact on earnings.

Furthermore, if recent surveys are to be believed, AT&T should not overestimate its hold on the market. According to a recent Changewave Research survey, among hundreds of iPhone 4 users surveyed, the top two complaints centered on AT&T. Twenty-seven percent complained about the exclusivity requirement and 24% complained about the quality of the network. Recently, Davenport & Co. analyst F. Drake Johnstone predicted that as many as 40%, or 6 million iPhone users, would ditch AT&T when Verizon enters the picture.

Typically, I don’t bet the ranch on analyst recommendations, but he brought up at least solid point: AT&T recently rose its early termination fee to $325 from $175. Thus while it’s all sunshine and puppies in AT&T’s SEC filings, the proof is in the termination fee. AT&T is worried, and it should be.

Full disclosure: I have been a loyal AT&T user since 2007, when the iPhone first debuted—- and I can’t wait to switch to Verizon (2011 please).

We offer a large variety of handsets, including at least 18 smartphones (including Apple iPhones, our most popular models) with advanced operating systems from at least 7 manufacturers. As technology evolves, rapid changes are occurring in the handset and device industry, with the continual introduction of new models or significant revisions of existing models. We believe offering a wide variety of handsets reduces dependence on any single handset as these products evolve. In addition, offering a number of attractive handsets on an exclusive basis distinguishes us from our competitors. As these exclusivity arrangements end, we expect to continue to offer such handsets (based on historical industry practice), and we believe our service plan offerings will help to retain our customers by providing incentives not to move to a new carrier. As noted above, more than 80 percent of our postpaid subscribers are on Family Talk® Plans and business plans that would involve moving the whole group to a new carrier. Moreover, the vast majority of our postpaid subscribers (including Family Talk® Plan users) are allowed to accumulate unused minutes (known as rollover minutes), a feature that is currently not offered by other major post-paid carriers in the United States, and users would lose these minutes if they switched carriers. As is common in the industry, most of our phones are designed to work only with our wireless technology, requiring customers who desire to move to a new carrier with a different technology to purchase a new device. In addition, many of our handsets would not work or would lose some functionality if they were used on another carrier’s network (even a carrier using GSM technology), requiring the customer to acquire another handset. Although exclusivity arrangements are important to us, such arrangements may not provide a competitive advantage over time, as the industry continues to introduce new devices and services. Also, while the expiration of any of our current exclusivity arrangements could increase churn and reduce postpaid customer additions, we do not expect any such terminations to have a material negative impact on our Wireless segment income, consolidated operating margin or our cash from operations.